Accounts and Audit

The following major changes are introduced under the new CO regarding financial reporting -

• Streamlining disclosure requirements that overlap with the accounting standards (see Q11 below).

• Relaxing the criteria for companies to prepare simplified financial reports and directors’ reports i.e. the new "reporting exemption" (see Q3 to Q10 below);

• Making the summary financial report provisions more user-friendly and extending their application to all companies (see Q18 below);

• Requiring public companies and other companies that do not qualify for simplified reporting to prepare a “business review” in the directors’ report (see Q21 below);

• Clarifying the financial year of a company (see Q23 below) and requiring companies to hold annual general meetings, and public companies or companies limited by guarantee to deliver annual returns, in respect of every financial year of the company for registration (see Q28 below and Highlights on Annual Returns of Local Companies); and

• Requiring an auditor who retires or is removed from office to give a statement of the circumstances connected with the cessation of office (see Q29 below and Highlights on Enhancement of Auditor's rights)

No. The new requirements regarding financial reporting apply to the company’s first financial year after the commencement of the new CO and subsequent financial years (section 358).

"Reporting exemption" means the exemptions available to private or guarantee companies (other than certain companies specifically excluded) that are qualified to prepare simplified accounts and directors’ reports. The exemptions are in respect of specific requirements relating to the preparation of financial statements, directors’ and auditor’s reports and they include –

• no requirement to disclose auditor’s remuneration in financial statements (section 380(3) and Schedule 4 Part 2);

• no requirement for financial statements to give a "true and fair view" (section 380(7));

• subsidiary undertakings may be excluded from consolidated financial statements in accordance with applicable accounting standards (section 381(2));

• no requirement to disclose in the notes to financial statements the material interests of directors in transactions, arrangements or contracts of significance (section 23 of Cap. 622G);

• no requirement to disclose or include in the directors’ report-

• a business review (section 388(3)(a))

• arrangements to enable directors to acquire benefits by the acquisition of shares or debentures

• donations

• directors’ reasons for resignation or refusal to stand for re-election

• material interests of directors in transactions, arrangements or contracts of significance entered into by a specified undertaking of the company

  (sections 3(3A), 4(3), 8(3) and 10(7) of Companies (Directors’ Report) Regulation, Cap. 622D ("Cap. 622D"));

• no requirement for the auditor to express a "true and fair view" opinion on financial statements (section 406(1)(b)); and

• financial statements may be prepared in compliance with the Small and Medium-Sized Entity Financial Reporting Standard and Financial Reporting Framework issued or specified by HKICPA.

The qualifying criteria are as follows-

• a small private company / holding company of a group of small private companies which meets two of the following conditions in a financial year –

  • total revenue / aggregate total revenue not exceeding $100 million

  • total assets / aggregate total assets not exceeding $100 million

  • employees / aggregate number of employees not exceeding 100

    (sections 359(1)(a), 359(2), 361, 364 and Schedule 3 section 1(1), (7) and (8))

• other private company (not being a member of a corporate group) with unanimous members’ written agreement (section 359(1)(b));

• a small guarantee company / holding company of a group of small guarantee companies with total revenue / aggregate total revenue not exceeding $25 million in a financial year (sections 359(1)(a), 359(3), 363, 366 and Schedule 3 sections 1(5),(12A) and (13));

• an eligible private company / holding company of a group of eligible private companies which meets higher size criteria (i.e. two of the following conditions in a financial year: total revenue / aggregate total revenue not exceeding $200 million, total assets / aggregate total assets not exceeding HK$200 million, and employees / aggregate number of employees not more than 100) and with 75% approval from members of the holding company and no member votes against the resolution (sections 359(1)(c), 359(2), 360, 362, 365 and Schedule 3 section 1(3), (10) and (11)).

• a holding company of a group of companies comprising one or more small private companies / eligible private companies and one or more small guarantee companies (mixed group) provided that the holding company and all of its subsidiaries meet the prescribed size criteria, and (where any member of the group is an eligible private company but not qualified as a small private company) with 75% approval from members of the holding company and no member votes against the resolution (sections 359(3A), 360, 366A and Schedule 3 section 1(8), (11) and (13)).

The group of small private companies / small guarantee companies / eligible private companies or the mixed group as mentioned above may include non-Hong Kong body corporates.

If a company meets the qualifying criteria for the reporting exemption, the exemption will be available to the company in its first financial year that begins on or after the commencement of the new CO or the Companies (Amendment) (No. 2) Ordinance 2018 (as the case may be) and in every subsequent financial year, until the company is disqualified for the exemption.

Unless the subsidiary is a company specified in section 359(4) (which includes, for example, a bank, an insurance company, etc.), it is qualified for reporting exemption if it meets the size criteria or obtains the necessary members’ approval for it to fall within the reporting exemption.

Section 359(1)(b)(iii) requires all members of a company to agree in writing that the company is to fall within the reporting exemption. It is not a requirement for a resolution to be passed at a meeting by all members of the company or by all members attending the meeting.

Sections 360(1) and (2) require a resolution passed by the members holding at least 75% of the voting rights in the company i.e. 75% of the voting rights of all members of the company.

Yes. A company must deliver a copy of an agreement made for the purposes of section 359(1)(b)(iii) or a resolution passed for the purposes of section 360(1) or (2) to the Registrar for registration respectively within 15 days after it is made or passed pursuant to sections 622(1)(e) and (f) of the new CO.

Yes. Audit of financial statements is required for all companies, including companies falling within the reporting exemption, except dormant companies (section 447).

When determining the eligibility of the holding company of a group of companies for the reporting exemption under section 359(2), (3) or (3A), the size of the group as a whole is relevant. The relief provided in the SME-FRS is relevant for the purpose of excluding one or more subsidiary undertakings from the annual consolidated financial statements pursuant to section 381(2) only. In other words, the size of the group must satisfy the size criteria, and the exception in the SME-FRS should not be taken into account in determining eligibility for reporting exemption.

The general requirements are –

• a company’s directors must prepare for each financial year financial statements that comply with sections 380 and 383 (section 379(1));

• if the company is a holding company at the end of the financial year, consolidated financial statements must be prepared instead unless the company is a partially owned subsidiary where no member requests for the preparation of consolidated financial statements or all members agree in writing that consolidated financial statements will not be prepared (sections 379(2), 379(3)(b) and (c) and 379(3A)(b));

• if the company is a partially owned subsidiary where no member requests for the preparation of consolidated financial statements or all members agree in writing that consolidated financial statements will not be prepared, company level financial statements must be prepared (section 379(1), 379(3)(b) and (c) and 379(3A)(b));

• if the company is a wholly owned subsidiary, either company level financial statements or consolidated financial statements must be prepared (section 379(3)(a) and 379(3A)(a));

• subject to permitted exclusions, the consolidated financial statements must include all the subsidiary undertakings of the company (section 381);

• unless the company falls within the reporting exemption, the financial statements must give a true and fair view of the financial position and financial performance of the company (sections 380(1), (2) and (7));

• the financial statements must comply with –

  • the accounting disclosure requirement in Schedule 4 (section 380(3));

  • applicable accounting standards issued or specified by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) (sections 357(1), 380(4) and the Companies (Accounting Standards (Prescribed Body)) Regulation, Cap. 622C);

• the notes to financial statements must contain the information prescribed by the Companies (Disclosure of Information about Benefits of Directors) Regulation, Cap. 622G ("Cap. 622G") (section 383); and

• the financial statements must be audited (section 405).

Other requirements are in relation to the laying, sending, publication (sections 429 to 432 and 436) and voluntary revision of financial statements (section 449 and the Companies (Revision of Financial Statements and Reports) Regulation, Cap. 622F).

The above requirements do not apply to a company that is dormant (section 447).

Yes. If the holding company is a wholly owned subsidiary of another body corporate at the end of the financial year, the company has an option to prepare consolidated statements instead of company level financial statements.

Pursuant to section 379(2), a holding company must prepare consolidated financial statements that comply with sections 380, 381 and 383. Section 381(2) provides that if the company falls within the reporting exemption, one or more subsidiary undertakings may be excluded from the annual consolidated financial statements in compliance with the accounting standards applicable to the statements. Accordingly, if all of the subsidiary undertakings are excluded in accordance with the applicable accounting standards, the holding company’s financial statements will be its own company level financial statements.

Section 381(3) provides that if the company does not fall within the reporting exemption –

1. one subsidiary undertaking may be excluded from the annual consolidated financial statements if the inclusion of the subsidiary undertaking is not material for the purpose of giving a true and fair view of the financial position and financial performance; and
2. more than one subsidiary undertaking may be excluded if the inclusion of those subsidiary undertakings taken together is not material for the purpose of giving a true and fair view of the financial position and financial performance.

Accordingly, if the company has only one subsidiary undertaking and the subsidiary undertaking is excluded pursuant to section 381(3)(a), or if all of the company’s subsidiary undertakings, when taken together, are immaterial as provided in section 381(3)(b), then the holding company’s financial statements will be its own company level financial statements.

Yes. Section 387 of the new CO provides that the directors must approve and sign a statement of financial position that forms part of any financial statements. As section 2 of Part 1 of Schedule 4 to the new CO requires the company level statement of financial position of the holding company to be contained in the notes to the company’s consolidated financial statements, the requirements in section 387 apply to that company level statement of financial position.

Yes. There are new provisions requiring the directors’ report to contain the following information –

• a business review (please see the answer to Q21 below);

• equity-linked agreements entered into by the company (section 6 of Cap. 622D);

• a summary of the reasons relating to the affairs of the company given by a director who has resigned or refused to stand for re-election (section 8 of Cap. 622D) (except for companies falling within the reporting exemption); and

• permitted indemnity provision for the benefit of directors (section 470 and section 9 of Cap. 622D).

Other changes include –

• The amount of donations made by the company and its subsidiary undertakings which are exempted from disclosure is raised to $10,000 from $1,000 in section 129D(3)(e) of the old Companies Ordinance (Cap. 32) ("the old Ordinance") (section 4 of Cap. 622D); and

• The requirement under section 129D(3)(j) of the old Ordinance is modified. The disclosure of information on material interests of directors in contracts of significance entered into by a company or a specified undertaking of the company is expanded to cover transactions and arrangements in addition to contracts and, where the company is a public company, material interests of a connected entity of a director of the company. ("Specified undertaking" means a parent company or subsidiary undertaking of the company, or a subsidiary undertaking of the company’s parent company.) In line with the approach under the old Ordinance, the requirement does not apply to companies falling within the reporting exemption (section 10 of Cap. 622D). For material interests of directors in transactions, arrangements and contracts entered into by a specified undertaking of a company, the information must be contained in the directors’ report of the company. For transactions, arrangements and contracts entered into by the company, disclosure of the information is required to be made in the notes to financial statements instead (section 383 and section 22 of Cap. 622G).

For a company which is a holding company and an annual consolidated financial statements and a consolidated directors' report are prepared under section 388(2), the consolidated directors’ report must contain the name of every person who was a director of the company or of the subsidiary undertakings included in the financial statements -

1. during the financial year; or
2. during the period beginning with the end of the financial year and ending on the date of the report.

Pursuant to section 390(4) to (7), the requirement to disclose the name of every director of a company’s subsidiary undertakings in the company’s directors’ report may be dispensed with if a list of the name of every person who was a director of the company’s subsidiary undertakings during the period as stated in (i) or (ii) above is –

1. kept at the company’s registered office and made available for inspection by the members free of charge during business hours, or
2. made available on the company's website,

The above does not affect the requirement to disclose the names of the directors of the holding company and other particulars required under section 390, such information must be contained fully in the directors' report.

No. Similar to the financial reporting requirements mentioned in Q2 above, the new requirements regarding contents of a directors’ report will apply to the directors’ report of an existing company for the first financial year after the commencement of the new CO and subsequent financial years (sections 358(1) and (5)).

Yes. Section 441 provides companies (other than those falling within the reporting exemption) with a choice of sending a copy of the summary financial report instead of a copy of the full reporting documents (defined in section 357(2) to mean the financial statements, directors’ report and auditor’s report) to their members. There is no need for a company to ask its members in advance before it can send them a copy of the summary financial report. Members receiving the summary financial report may request a copy of the full reporting documents from the company (section 445).

Section 436 applies to the circulation, publication or issuance of “specified financial statements” or “non-statutory accounts”. Under section 436(6) “non-statutory accounts” basically means any statement of financial position or statement of comprehensive income, otherwise than as part of the financial statements; or accounts in any form, otherwise than as part of the financial statements, purporting to be a statement of financial position or statement of comprehensive income for a group of companies. Section 436 does not apply to summary financial reports.

If a company circulates, publishes or issues any non-statutory accounts, such accounts must not be accompanied by the auditor’s report on the specified financial statements. If the 'non-statutory accounts' are included in the same document containing the specified financial statements but it is clear that the auditor’s report on those financial statements only relates to the specified financial statements and not to the ‘non-statutory accounts’ included in the same document, the prohibition on auditor’s report accompanying non-statutory accounts as mentioned above is not contravened. Notwithstanding this, the 'non-statutory accounts' may be accompanied by a separate report from the auditor on the non-statutory accounts if it is clear that the report is not the auditor’s report that was issued on the company’s ‘specified financial statements’.

A business review is required to be contained in a directors’ report. It should include the following information of a company –

• a fair review of its business;

• a description of the principal risks and uncertainties facing the company;

• particulars of important events affecting it that have occurred since the end of the financial year;

• an indication of likely future development in its business;

• a discussion of its environmental policies and performance, and its compliance with relevant laws and regulations that have a significant impact on the company; and

• an account of its key relationships with employees, customers, suppliers and others that have a significant impact on the company and on which its success depends.

  (section 388 and Schedule 5)

Not all companies are required to prepare a business review. Under section 388(3), the following companies are not required to prepare a business review -

• a company that falls within the reporting exemption;

• a wholly owned subsidiary of a body corporate; and

• a private company that does not fall within the reporting exemption, the members of which has passed a special resolution to the effect that the company is not to prepare a business review for the financial year. The special resolution must be passed at least 6 months before the end of the financial year to which the directors’ report relates (section 388(4)). The special resolution is required to be delivered to the Registrar for registration within 15 days after it is passed (section 622).

The phrase “relevant laws and regulations” in section (2)(b)(ii) of Schedule 5 means those laws and regulations relating to the environment and a business review should include a discussion on the company’s compliance with such laws and regulations that have a significant impact on the company.

A company’s first financial year begins on the first day of its first accounting reference period and ends on the last day of that period, or another date within 7 days before or after the end of that period as specified by the directors (section 367(1)). For an existing company, the first accounting reference period begins on the day immediately following its primary accounting reference date and ends on the first anniversary of that date (section 368(1)). Please see the answer to Q28 for examples.

An accounting reference period is the period by reference to which the company’s annual financial statements are to be prepared. The first and last days of the first accounting reference period determine the company’s first financial year under the new CO (section 367). Every subsequent accounting reference period of a company is a period of 12 months beginning immediately after the end of the previous accounting reference period and ending on its accounting reference date, unless the accounting reference period is shortened or extended by alteration of the accounting reference date (section 368(3)). For examples of “first accounting reference period”, please see the answer to Q28.

The first accounting reference period is determined as follows -

• For an existing company, it begins on the day immediately following its primary accounting reference date and ends on the first anniversary of that date (section 368(1)). Please see the answer to Q28 for examples.

• For a company formed and registered under the new CO, it begins on its incorporation date and ends on its primary accounting reference date (section 368(2))

• For the meaning of “primary accounting reference date”, please see the answer to Q26 below.

The "primary accounting reference date" is the end date of the accounts or financial statements by reference to which the first accounting reference period, i.e. the first financial year, of a company under the new CO is determined (section 368).

• Existing company

  For an existing company, the primary accounting reference date is the date up to which the company’s accounts for the financial year beginning before the commencement of the new CO (“the relevant financial year”) are made, if the accounts have been laid before the company in general meeting under section 122 of the old Ordinance or provided to the members under section 111(6) of the old Ordinance on or after the commencement date of the new CO (sections 369(1)(a), (2) and (3)). Please see the answer to Q28 for examples.

  If the accounts for the relevant financial year have not been so laid or provided to members, the primary accounting reference date is determined as follows, pursuant to sections 369(1)(b), (2) and (4) –

1. it is the end date of the accounts for the relevant financial year that have been prepared on or before the date by which the company is required by section 111(1) of the old Ordinance to hold a general meeting (sections 369(1)(b)(i) and (2));
2. if (a) does not apply, it is the first anniversary of the end date of the accounts for the financial year immediately preceding the relevant financial year that have been prepared on or before the date by which the company is required by section 111(1) of the old Ordinance to hold a general meeting for the financial year immediately preceding the relevant financial year (sections 369(1)(b)(ii) and (4)); and
3. if (a) and (b) do not apply, and – 
   1. if the company is required by section 111(1) of the old Ordinance to hold a general meeting, it is the date by which the meeting is required to be held (section 369(1)(b)(iii)).; or
   2. if the company was a dormant company at the beginning of the commencement date of the new CO but has ceased to be dormant, it is the date specified by the directors (which must fall within 18 months after the date the company ceased to be dormant), or if no date is specified before the last day of the month in which the anniversary of the company’s incorporation first occurs after the company ceased to be a dormant company, it is the last day of the month (section 369(1)(b)(iii) and (iv)). 

• Company registered under the new CO

  For a company registered under the new CO, the primary accounting reference date is a date specified by the directors that falls within 18 months after its incorporation date, or if no date is specified by the directors, the last date of the month in which the first anniversary of the company’s incorporation falls (sections 369(5) to (7)).

The accounting reference date is the anniversary of the company’s primary accounting reference date and is the end date of subsequent accounting reference periods (sections 368(3) and 370) –

• For an existing company, the accounting reference date is the anniversary of the company's primary accounting reference date determined under bullet 1 of the answer to Q26 above.

• For a company formed and registered under the new CO, it is the anniversary of the company's primary accounting reference date determined under bullet 2 of the answer to Q26 above.

• Subject to the provisions in section 371, the accounting reference date can be altered by a resolution of directors.

The following examples are given on the basis that the new CO came into operation on 3 March 2014 and the accounts of the companies have been prepared under the old Ordinance in the circumstances described in sections 369(1) to (4).

A "statement of circumstances" is defined in section 392 of the new CO to mean a statement given under section 424(a) or 425(1)(a), i.e., a statement of the circumstances connected with the resignation or termination of appointment of an auditor who considers that such circumstances should be brought to the attention of the company’s members or creditors.

The auditor who has given the company a statement of circumstances is required to deliver a copy of the statement to the Registrar for registration in the circumstances, and within the period, mentioned in sections 426(5) and 427(5).

Compared to section 140A of the old Ordinance, the auditor's duty to make a statement of circumstances is extended from cases of resignation of auditors to removal of auditors from office or retirement of auditors who are not reappointed.

For application of the new CO provisions and transitional arrangements, please refer to section 358(9) and section 81 of Schedule 11 to the new CO.

Yes. In relation to resignation of auditor, section 417(3) of the new CO requires a company to deliver a notification of the resignation in a specified form - Notification of Resignation of Auditor (Form NA2) to the Registrar for registration within 15 days beginning on the date on which the company receives the notice of resignation.

In relation to removal of auditor from office, if an ordinary resolution for the removal is passed, under section 419(4) of the new CO the company must deliver a notice in the specified form – Notice of Removal of Auditor (Form NA1) to the Registrar for registration within 15 days beginning on the date on which the resolution is passed. Compared to section 131(6) of the old Ordinance (which does not apply to private companies), the filing requirement under the new CO applies to all types of companies, and the period is changed from 14 days to 15 days.

For application of the new CO provisions and transitional arrangements, please refer to section 358(9) and section 81 of Schedule 11 to the new CO.

If the outgoing auditor gives a statement to the company under section 424(b) or section 425(1)(b) that there are no circumstances connected with his or her resignation or termination of appointment as an auditor that should be brought to the attention of the company’s members or creditors, there is no requirement to deliver such statement to the Registrar of Companies for registration.